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Wing Fung Group Asia (HKG:8526) shareholders are no doubt pleased to see that the share price has had a great month, posting a 43% gain, recovering from prior weakness. The full year gain of 28% is pretty reasonable, too.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
View our latest analysis for Wing Fung Group Asia
How Does Wing Fung Group Asia's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 14.89 that there is some investor optimism about Wing Fung Group Asia. The image below shows that Wing Fung Group Asia has a higher P/E than the average (8.2) P/E for companies in the construction industry.
Its relatively high P/E ratio indicates that Wing Fung Group Asia shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Wing Fung Group Asia's earnings made like a rocket, taking off 80% last year. Unfortunately, earnings per share are down 12% a year, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Wing Fung Group Asia's Balance Sheet
With net cash of HK$22m, Wing Fung Group Asia has a very strong balance sheet, which may be important for its business. Having said that, at 11% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.